Honest guidance for navigating the offline world

Why Sam Walton Admits Retailers Inherently Unsophisticated

Sam Walton, the retailing-pioneer founder of Walmart, is mostly known for his affluence. Few know the reason for his success was candor, hard work, and a religious commitment to testing everything.

Sam trusted his employees to likewise be experimental. They’d keep the stuff that worked and throw out the ones that flopped.

On one occasion, Phil Green, an early store manager, worked up what was the world’s largest display of Tide, a laundry detergent.

Phil worked out a deal to get $1.00 off a case if he would but some absolutely ridiculous amount of detergent, something like 3,500 cases of the giant-sized box. Then he ran it as an ad promotion for, say, $1.99 a box, off from the usual $3.97. Well, when all of us in the Bentonville office saw how much he’d bought, we really thought old Phil had completely gone over the dam… It made up a pyramid of detergent boxes that ran twelve to eighteen cases high – all the way to the ceiling, and it was 75 or 100 feet long, which took up the whole aisle across the back of the store, and then it was about 12 feet wide so you could could hardly get past it.

I think a lot of companies would have fired Phil for that one, but we always felt we had to try some of this crazy stuff.

But testing, while critical and too often missed in today’s retail world, was not enough to make Walmart what it was. Sam was also honest. Brutally honest.

By the time I got out in the world ready to make something of myself, I already had a strongly ingrained respect for the value of a dollar. But my knowledge about money and finances probably wasn’t all that sophisticated in spite of the business degree I had.

So Sam set out to become sophisticated, for he knew it would be impossible to compete if his company wasn’t.

We had a good thing going before Ron (Ron Mayer, the first man to have the CEO title after Sam Walton) arrived, but he, and some of the people he brought on board, like Royce Chambers, our first data processing manager, gave the company its first sophisticated systems. And those systems were the beginnings of a management method which allowed us to stay real close to our stores even as our growth exploded.

From Ron Mayer’s arrival on, we as a company have been ahead of most other retailers in investing in sophisticated equipment and technology. The funny thing is, everybody at Walmart knows that I’ve fought all these expenditures as hard as a I could… the truth is, I did want it, I knew we needed it, but I just couldn’t bring myself to say, ‘Okay, sure, spend what you need.’

As the company grew, Sam realized the need to attract sophisticated people to keep the operation running.

Obviously if we were going to grow, we had to bring in college-educated folks. But at first, the culture tried to reject them. And now that we have even more complicated needs – in technology, finance, marketing, legal, whatever – our demand for a more sophisticated work force is growing all the time.

All this requires some basic changes in the way we think about ourselves, about who’s a good Walmart hire for tomorrow…

Sam admits the natural culture of retail is to reject those that are sophisticated. Why is that?

In 1999, psychologists David Dunning and Justin Kruger of Cornell University conducted a series of experiments after hearing the case of a man named Arthur Wheeler. Wheeler boldly robbed two banks after covering his face with lemon juice and nothing else. Why? Arthur knew that lemon juice was usable as an invisible ink, thus he concluded that lemon juice would make his face invisible to security cameras.

The result of their studies was the Dunning-Kruger Effect. This effect stipulates that low-ability individuals suffer from illusory superiority and mistakenly assess their ability as much higher than it really is.

Further research by Dr. Dunning has led to what he calls “expedient escape”.

…You’re telling (low-ability) people things that may cause them to question what they believe and there’s a good chance they won’t take it very well.

Sam Walton had the self-awareness to know what would be needed to succeed:

(In his very own, published words) sophistication.

Walmart, and to a large extent McDonald’s, found initial success in pioneering new business models and running away with them at breakneck speed. The bar for sophistication was relatively low during those periods of time. Now their competition has not only copied these business models but is using data sophistication to execute them faster and cheaper.

This has left a shellshocked culture that struggles to attract sophisticated talent by today’s standards (i.e. understands and uses data intelligently). The vestiges cannot formulate a worthwhile plan because the unsophisticated, by Dunning-Kruger logic, have a difficult time proposing solutions for an increasingly sophisticated market. Thus you see the vicious loop of catch 22 that, in our opinion, is remedied only by activist-investor-cleansing of the senior ranks.

The incumbent retail leaders see no wrong in their methods. Apart from having a self-interest in the status quo, they simply cannot understand how they are negatively impacting the entire business, from the shareholders to the hourly employee.

Some in the industry have been quick to criticize our use of the word sophisticated, even while they say much fouler things about their own customers behind closed doors. But it’s a word used frequently by the most successful retailer of all-time. Sam would be honest and admit the same of his operations today: Walmart is not attracting the most sophisticated talent in an increasingly sophisticated world, and that is a problem.

Merchants should learn from Sam Walton’s self-awareness and embrace the notion you can improve yourself and your business by turning to others who know things you do not. When I get sick I visit a doctor; when my car breaks I visit a mechanic; when I get sodomized by the government in April I visit an accountant to minimize the damage.

For a merchant to ignore sophistication in their own business yet turn to sophisticated parties for personal needs is sign of serious cognitive dissonance. Or they’re Arthur Wheeler’s relatives. Either way, avoiding sophistication ends in disaster.